Industry Expert Clarifies Emerging Lawsuit Loan Industry
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UPDATED: Apr 23, 2013
According to a recent FOX Business story, the growing “lawsuit loan” industry accounts for $100 million in profits each year. Despite criticism that “lawsuit loans” charge sky-high interest rates, industry insiders claim that these allegations are inaccurate.
Lawsuit lending works by providing funds to plaintiffs in pending lawsuits in exchange for a fee. If the lawsuit loan lender believes the plaintiff can win, the plaintiff is given funding. This funding isn’t for payment to the plaintiff’s attorney. Rather, it is for common expenses such as groceries, rent or mortgage payments.
Most lawsuit lending customers are in need of money due to the large amount of time the legal system demands of them.
Kelly Gilroy, Executive Director of American Legal Finance Association told loans.org the facts about this latest type of financing and how it is markedly different than personal loans.
“It’s important to point out they’re not personal loans,” said Gilroy. “We call them consumer legal funding. Personal loans require credit checks and collateral; we don’t require any of that. People pay back out of the proceeds of their settlement.”
She also said that if there are not sufficient proceeds then lenders are not repaid.
Gilroy said this product is for people who miss work, fall behind on bills and suddenly find themselves in a financial hole.
The fees on lawsuit loans can vary. Gilroy said that funding companies charge different funding fees, and each fee is pre-determined. If a case is settled for less than anticipated, then the companies negotiate a new fee in cooperation with attorneys.
Even though critics are quick to decry “lawsuit loans” as just another type of high-interest personal loan, Gilroy was sure to detail their marked differences.
“It’s just a very different product,” said Gilroy. “At the end of the day you don’t owe that money back. It’s a very different set of circumstances. Consumers are never worse off after holding one. They never get sucked into a cycle of debt or get their wages garnished.”
Unlike payday and personal loans, lawsuit loans have yet to receive widespread regulation. In fact, according to Gilroy only three states currently regulate the industry: Maine, Ohio and Nebraska. Those states require certain consumer-friendly standardized information in each contract, which takes the “guesswork” out while allowing consumers and their attorneys to determine which funding offer is the better deal.
“Whenever there’s been an issue with the product, it is because an attorney didn’t know a client took funding,” said Gilroy. “We require an attorney’s signature in order to approve funding. We support financial regulation for this product.”
(Interview with Ms. Gilroy conducted by Isaac Juarez)